Turbulence, A Diverted Flight and Glass House

Uncertainty and Opportunity Sometimes Go Hand in Hand

Last week, my family boarded our first flight in nineteen months. We were headed to Atlanta for a family reunion in the Smoky Mountains of North Carolina. As we approached Atlanta, we were warned by the pilot of some “weather.”

Something you don’t want to see when you look out your plane window is lightening and something you don’t want to hear is thunder. While my wife and I exchanged worried looks, my kids let out squeals of delight at the bumps and bounces. And then on our final descent, our plane suddenly ascended very quickly. Next thing we knew, we were bound for Knoxville, Tennessee.

Three hours after landing in Knoxville, we were finally able to get our bags, I had secured a new car rental and had reconfigured our plans to drive over 3.5 hours to our destination. At 1am, after fog appeared in the mountains coupled with upset stomachs from hairpin mountain turns we decided to look for a place to stop for the night. We were grateful to find a small hotel in the middle of nowhere between North Carolina and Tennessee. Our trip, which was supposed to be 10-11 hours door to door, eventually became 30 hours. And that is with three small children (somehow, they were all quite amazing, considering the circumstances).

But here is the thing, despite the stress and uncertainty, we eventually made it to our family reunion and had a wonderful, albeit slightly truncated trip.

During the same time, Glass House Group (OTC: GLASF), went through its own turbulence. Uncertainty over the timing of the closing of the greenhouse and whether the company raised enough capital to close the greenhouse, caused some investors to panic. Other questions included whether the company also had enough for the required capital expenditures to upgrade the greenhouse from tomatoes to cannabis.

But even more concerning was the absolute silence from the company following its first quarter earnings that were a bit confusing and slightly lower than expectations. Instead of a strong investor relations effort to respond to questions about the company’s earnings, the greenhouse or the future, Glass House was silent.

If there is anything I have learned over almost three decades of investing it is that the stock market hates uncertainty and non-responsiveness from management. So the stock went into freefall, plummeting almost 50% at one point.

After the radio silence, the company finally announced that they are going to release Q2 on August 16th and will host a conference call on August 17th. Then the company announced the news that it was accelerating the close of its greenhouse and got the seller to accept seller financing for $30 million, easing any concern of Glass House’s ability to close the greenhouse acquisition.

In the short term, especially in this market environment, price drives narrative. Has anything really happened to Glass House other than its stock price falling? No, not really. Does the company have to raise a bit more money from the debt market to fund the retrofit of the greenhouse? Yes, probably. But with over $200 million of unencumbered real estate assets, that shouldn’t be a problem.

The worst sin the company committed appears to be that management was not prepared for being a public company. While CEO Kyle Kazan and President Graham Farrar have extensive business experience and have a history of success, they are inexperienced in the public markets. Despite that inexperience, both are strong operators, and more importantly, they are also good people as my own personal experience and research checks have shown. They will get their public market sea legs and I expect them to be quick learners.

Not only will they learn quickly, but they also can lean on Jamie Mendola and Jonathan Sandelman from Mercer Park (the SPAC sponsor) who have lots of experience navigating the turbulent cannabis public markets with AYR Wellness.

And AYR Wellness is a wonderful example of how fickle the cannabis markets can be in the short term. I first wrote up the company when it was called Cannabis Strategies Acquisition Corporation when the stock traded near $16 per share. It initially went up to $18, then plummeted to $4.50. Then over the next two years soared to $30 as the company and team executed on their plan and vision.

But even better is what happened to AYR’s warrants. They went from $2 to $4 after my report, then plunged to $1, then soared to $20. My biggest omission from last year was not making both AYR’s stock and its warrants bigger positions. There aren’t many investments that return six and twenty times in one year. (I still own both positions)

I believe that Glass House will strengthen its investor relations chops and I also believe the company will start to answer investors’ questions. The Glass House journey will probably have more bumps along the way, but if the company can execute on its strategy, the opportunity is now much greater due to the market’s reaction and the lower stock price.

And one last very important point to mention is the dramatic sea change in California cannabis retail licensing:

Scores of cities and counties are preparing to issue marijuana business permits or are writing ordinances in order to award licenses, according to Los Angeles-based consultant Hirsh Jain, the founder of Ananda Strategy.

By Jain’s count, 18 cities across California already have begun handing out retail permits since the November election, in which more than 30 local jurisdictions approved pro-marijuana business ballot measures.

And, he said, at least another 18 jurisdictions are poised to do the same.

As many know, illegal cannabis in California has been a major problem for the legal market. Why? Because California has let many cities and counties opt completely out of cannabis but have refused to enforce illegal operations that pop up in those areas. Remarkably, only 38% of cities and approximately 50% of CA counties allow legal cannabis sales. The first thing that happens upon new legal licenses being issued, is new tax revenue. And right after new tax revenue is funding for enforcement. And all those new legal retail licenses need legal wholesale cannabis to sell.

“There are 745 dispensaries in California right now,” Jain said (not including licensed delivery services or microbusinesses). “On a per-capita basis, there should be between 4,000 and 5,000.”

He said he believes that will become a reality, but not until about 2025.

That is potentially a 500% increase in retail dispensaries in California in the next four years. Sounds like this might be the right time to be ramping up a massive cannabis greenhouse!

Investors might soon forget the turbulence of the past few weeks and maybe this is just the opening chapter to a wonderful journey.